Pollution Monitoring and the Pricing of Environmental Risk in Firms

Pricing firms’ environmental risk is central to ensuring that capital is efficiently allocated. We examine whether an increase in the salience of pollution information affects the beliefs and perceived valuations of financially sophisticated agents—financial analysts—regarding the environmental risks faced by the firms they cover. Exploiting the staggered rollout of China's ambient air quality monitoring program, we show that when monitoring is introduced in a city, analysts based there become substantially more likely to discuss air pollution. These changes in attention are reflected in stock prices: reports issued by treated analysts generate more negative market reactions for brown firms and more positive reactions for green firms, with little change for environmentally neutral firms. These price responses do not subsequently reverse. Treated analysts increase their information acquisition through corporate site visits and issue less favorable assessments of brown firms and more favorable assessments of green firms. Our findings show that ambient environmental monitoring can affect asset prices by making environmental risks more salient and inducing greater information production about their implications for firm value.